REA Group: Result 2014
Recommendation
The hot Australian property market has translated into another bonanza year for REA Group, with net profit rising 37% to $150m on revenue that grew 30% to $438m. Earnings per share rose 36% to 114 cents, although this was less than the $1.16 expected and the shares have duly fallen almost 8% (in a market that’s down over 1 per cent, mind).
REA finished the period with net cash of $254m, almost unchanged from last year's $257m despite the company making a number of acquisitions during the year, most recently shelling out $106m for 17% of iProperty Group (see REA buys stake in iProperty Group on 29 Jul 14 (Hold – $47.82)). A 35 cent final dividend will be paid (fully franked, ex date 18 Aug), making 57 cents for the year and giving the stock a fully franked yield of about 1.3%.
The performance was driven by a 69% surge in listing depth (ie premium) products to $220m, while subscription revenues fell 9% reflecting the company’s new pricing model. Overall, average revenue per agent (ARPA) rose 30% to $2,587, while the company saw a 12% increase in monthly visits to its main websites, to 23,013 and a 54% increase in monthly visits to its mobile sites to 7.2m.
Key Points
- Earnings up strongly thanks to premium products
- New CEO and CFO to start next month
- News Corp offers better value (and a bunch of very different business)
The total monthly visits of 30.3m was 3.1 times that of Domain, up from 2.8 times last year. Furthermore, the company quoted Nielsen research from June 2014 suggesting that 69% of its audience doesn’t visit Domain.
Agents will no doubt continue to complain about the higher fees, and they will no doubt get a fair hearing from publications owned by Fairfax, which also owns Domain. But with REA having such a sizeable lead, it’s hard to see how this will make much of an impression.
At the risk of further accusations from agents of a divide and conquer approach, the company is about to launch ‘Agent Profiles’, which will help vendors select the right agent to sell their home. Apparently 67% of potential vendors say this is the most stressful part of selling their property (although, respectfully, they can’t have been through the rest of the process).
Year to 30 Jun | 2014 | 2013 | /(–) (%) |
---|---|---|---|
Revenue ($m) | 438 | 337 | 30 |
EBIT ($m) | 204 | 145 | 40 |
Net profit ($m) | 150 | 110 | 37 |
EPS (c) | 114 | 83 | 36 |
PER | 38 | 52 | n/a |
DPS (c) | 57 | 41.5 | 37 |
Div. yield | 1.3 | 1.0 | n/a |
Franking (%) | 100 | 100 | n/a |
Other innovations include ‘Connections’, which will help consumers ‘compare and connect to services such as finance, electricity, telecommunications and entertainment’.
Tough act to Fellows
When REA next reports it will be led by Tracey Fellows, who is due to start in a couple of weeks. Fellows will replace Peter Tonagh, chief operating officer of News Corp Australia, who has been interim CEO since Greg Ellis left in March. Fellows was most recently Executive General Manager of Communication Management Services at Australia Post. Before that she was Microsoft Vice-President for the Asia-Pacific region and before that she was managing director of Microsoft in Australia and New Zealand. The company will also have a new chief financial officer, in Owen Wilson, who starts next month and was previously CFO at Chandler Macleod Group.
We don’t doubt that Fellows and Wilson are highly capable, but they have a tough act to follow and this probably represents the greatest risk for the company.
The stock is down 10% since REA buys stake in iProperty Group on 29 Jul 14 (Hold – $47.82), but that still puts it on a multiple of 38 times the earnings just reported and about 29 times forecasts for 2015.
If you want exposure to this stock, there’s probably better value in News Corp, although it comes with a bunch of very different businesses, with widely diverging performance (see News Corp: Result 2014 on 8 Aug 14 (Speculative Buy – $17.97)). As for REA itself, we’re continuing with our policy of not publishing a price guide due to the rapid growth and uncertainty over how long it will continue. But for faithful shareholders, while we'd suggest you keep an eye on your portfolio weighting, there’s plenty of reason to continue to HOLD.
Note: Our model Growth Portfolio holds shares in News Corp.